Why Obama's Home Affordable Modification Program Failed (Spoiler Alert: Thank Bank Of America et al)
Back when the Executive and Congress at least pretended not to abdicate all power to the Fed, one of the centerpiece programs designed to boost the housing market for the benefit of the poor (as opposed to letting Ben Bernanke make marginal US housing a rental industry owned by a handful of private equity firms and hedge funds), was Barack Obama's Home Affordable Modification Program (or HAMP), which attempted to prevent foreclosures by lowering distressed borrowers’ mortgage payments. Under the program, homeowners would be given trial modifications to prove they can make reduced payments before the changes become permanent. The program was a disaster as of the 3 million foreclosures that were targeted for modification in 2009, only 905,663 mods have been successful nearly five years later - a tiny 13% of the 6.9 million who applied (still, numbers which Obamacare would be delighted to achieve). Part of the reason: the program's reliance on the same industry that sold shoddy mortgages during the housing bubble and improperly sped foreclosures afterward. But there was much more. For the definitive explanation of everything else that went wrong, we go to Bloomberg's Hugh Son whose masterpiece released today explains how and why once again the banks - and especially one of them - won, and everyone else lost.
The story begins at Bank of America where instead of helping homeowners as promised under agreements with the U.S. Treasury Department, the bailed out bank stalled them with repeated requests for paperwork and incorrect income calculations, according to nine former Urban Lending employees. Urban Lending was one of the vendors brought in to handle grievances from lawmakers and regulators on behalf of borrowers, also operated a mail-processing center for HAMP documents. Some borrowers were sent into foreclosure or pricier loan modifications padded with fees resulting from the delays, according to the people, all but two of whom asked to remain anonymous because they signed confidentiality agreements. Curiously, Bank of America authorized Urban Lending to refer to itself as the Office of the CEO and President in letters and telephone conversations to "provide a seamless experience for homeowners who complained directly to Moynihan" in a way that would represent Urban and other vendors like Urban is as an extension of Bank of America.
Son chronicles the accounts of former employees of the BofA (non-) division who help explain why Obama’s plan fell far short of the 3 million averted foreclosures targeted in 2009.
The story continues, once again, at Bank of America:
Bank of America stands out in a program that lawmakers and former Federal Deposit Insurance Corp. Chairman Sheila Bair have called a failure, leaving many homeowners worse off. The second-largest U.S. lender canceled more trial modifications than any mortgage firm and sent the highest percentage of rejected customers into foreclosure, Treasury data show.
To help run its modification program, Bank of America relied on managers who had worked at Countrywide Financial Corp., the subprime lender it took over in 2008. Those executives created and enforced quotas for resolving complaints, according to the former employees. Among them was Rebecca Mairone, found liable by a federal jury in October for defrauding government-backed housing companies Fannie Mae and Freddie Mac while working at Countrywide.
Urban Lending staff, struggling to meet those quotas, resorted to falsifying records and improperly purging complaints, the people said. They sent letters containing inaccurate statements on Office of the CEO and President stationery to lawmakers and U.S. agency officials who sought assistance on behalf of borrowers, the former employees said.
Next, we learn some more about how Bank of America took its foreclosure modification duties seriously:
Tens of thousands of HAMP modifications were improperly denied by Bank of America and Urban Lending since April 2009, according to a July complaint filed by homeowners against the two companies in federal court in Colorado.
“Everyone knew that we weren’t helping people,” said Erik Schnackenberg, a customer-service manager who left Urban Lending in 2011 and now runs a yoga studio in Longmont, Colorado. “They were giving us all the pressure and none of the power to change anything. It was this absurd, self-contained ecosystem of worthlessness.”
Schnackenberg and other former employees, who spent from four months to three years at Urban Lending as customer-service representatives and auditors, said they spoke when contacted by Bloomberg News because they’re distressed by what they saw.
To be sure, the relationship was quite lucrative for Urban Lending...
Revenue at Urban Lending surged to $183.5 million last year from $8 million in 2007, making it one of the country’s fastest-growing minority-owned businesses, according to Black Enterprise magazine. Sanders, whose other holdings include the Pittsburgh restaurant Savoy and a stake in energy-drink maker Fever, declined to comment for this article.
Urban Lending expanded in Colorado after winning the Bank of America contract, moving into a five-story brick building in Broomfield with views of the Rocky Mountains. The firm also had a warehouse in Broomfield for processing documents from tens of thousands of HAMP applications.
There, unopened mail was stacked to the ceiling, said three people who spent time at the warehouse. Time-sensitive documents such as pay stubs grew stale, and paperwork was scanned into computer systems late or partially, triggering loan-modification rejections, the people said.
... if only the outfit took its tasks as seriously as it deposited the Bank of America checks. It turns out the only work that was taken seriously was how to find shortcuts to doing any actual work:
At the office in Broomfield, Urban Lending employees examined every letter from lawmakers to determine which were computer-generated and which were signed by a human, according to four former employees. The handwritten ones got special attention and were called wet signatures, they said. The others were referred to as dry.
The signatures of some U.S. senators, including Democrats Harry Reid of Nevada, Carl Levin of Michigan and Charles Schumer of New York, were enlarged to two to three feet and tacked on the walls of a quality-control room to help employees identify wet signatures, the people said.
It was only downhill from there:
The most common tactic used to stall and reject homeowners was to claim they hadn’t submitted paperwork, according to all nine former employees. Urban Lending requested new applications and supporting documents including pay stubs every 30 to 60 days, even if the customer had sent them, the people said.
“People went through years of sending documents in,” said Daniel Ellersdorfer, 37, a customer advocate who left Urban Lending after 13 months in September 2012 and is now a scuba-diving instructor. “There were people who did everything right and they would still get screwed over and have to start the modification process all over.”
What was the motivation to delay the process? Simple: fees, and natural attrition that would ultimately make the applicants unacceptable for modification:
Borrowers whose modifications were delayed for a year or longer accumulated thousands of dollars in fees and interest and were disqualified for HAMP because their debt-to-income ratios worsened over time, four former Urban Lending employees said. Foreclosure or modifications under the bank’s own program, typically with higher interest rates, often became the only options, the people said.
Bank of America said it had given 891,100 of its own modifications as of October, more than three times as many as provided under HAMP. That’s because most of the bank’s customers didn’t qualify for the government plan, Sturzenegger said. The bank gave legal assignments, title searches and appraisals to its own subsidiaries, including Recontrust and LandSafe. Fees charged to homeowners ranged from about $45 a month to inspect the outsides of homes to about $850 for legal filings, according to three former Urban Lending employees.
Sure enough, if it was Bank of America's intent to accumulate the largest possible inventory of houses in foreclosure it did so admirably, with a trial foreclosure rate under HAMP of 33%: double the industry average, and the highest of the big bank participants.
Bank of America, which inherited hundreds of thousands of overdue borrowers from Countrywide, sent 33 percent of canceled HAMP trials into foreclosure through the end of July, the highest percentage of any of the biggest servicers, Treasury data show. The figure was 27 percent for Wells Fargo & Co. and 20 percent for both JPMorgan Chase & Co. and Citigroup Inc. The industry average was 22 percent.
“While the country as a whole has made significant progress, there is still room for improvement for servicers, and the Treasury is committed to applying pressure on the mortgage-servicing industry to improve servicer behavior,” Treasury Deputy Assistant Secretary Tim Bowler said in an e-mail.
The fact that Urban Lending was staffed with grotesquely underqualified workers certainly helped the end-goal of sequestering as much property as possible into shadow inventory, and thus taking it off the market (why: read all about Foreclosure Stuffing here).
The reality of working at Urban Lending contrasted with the training they received, six of the people said. Recruits were told during six-week introductory sessions that they were being paid $16 to $18 an hour to help Americans keep their homes.
Once they started, employees learned that Bank of America quotas applied to everyone from customer advocates to auditors and quality-control staff, the people said. They worked 15-hour days and on weekends with the knowledge they could be fired if they couldn’t meet targets. Properly resolving complaints was often impossible because Urban Lending employees couldn’t access needed files among a dozen software programs and relied on Bank of America personnel who often ignored requests, they said.
“Smart people would leave right away,” said Schnackenberg, the former Urban Lending manager. “You were left with people trying to take care of complex, aged files who were formerly assistant manager of a Taco Bell. It was a recipe for failure for homeowners.”
Under pressure from bank managers to close cases, Urban Lending workers resorted to shortcuts, six people said. That included forging power-of-attorney letters or removing notations that a customer hired a lawyer, making it easier to close files.
Managers purged complaints after business hours, circumventing an internal review process set up by Accenture Plc, according to two of the people. Employees falsified records to show late-night conversations with borrowers that didn’t happen, the people said.
In retrospect, with such rampant, unsupervised (or perhaps premeditated) criminality going on, one can see why the big banks were (and are) so eager to pay up any settlement proposal they get from Eric Holder, as long as nobody ends up in jail, and guilt is neither admitted nor denied of course.
But the biggest irony is perhaps that Bank of America used none other than the very same employees who originally were peddling the mortgages to consumers at Countrywide (purchased by Bank of America in the worst M&A deal of all time), to facilitate the HAMP "goals":
Bank of America used ex-Countrywide managers to push Urban Lending to meet its goals, according to the former employees. One of them was Mairone, the only individual named in the government’s first mortgage lawsuit from the financial crisis to reach trial.
Mairone was part of the Countrywide team that set up a program known as the Hustle, which removed quality-control steps for mortgages sold to Fannie Mae and Freddie Mac, costing the U.S.-backed firms $863.6 million, according to a Nov. 8 filing by prosecutors in federal court in New York.
She helped create Bank of America’s HAMP policies as the firm’s lead default-servicing executive, according to the July lawsuit.
Where is Mairone now? "Mairone joined JPMorgan in 2012 and now oversees vendors for that bank, according to a New York Times article." It really doesn't get any more hilarious than this...
Not stupid, Bank of America of course realized that one day an article such as this one would come out, so it took preventative steps:
Urban Lending employees were told by trainers that they should never admit fault on the bank’s behalf in writing or over the phone, four former workers said. They were warned that e-mails could be subpoenaed, the people said.
To soothe homeowners frustrated by delays, employees had a monthly allotment of $25 and $50 gift cards they could give customers, said three of the former workers. The joke among staff: It was just enough money to buy moving boxes.
Urban Lending employees said they were told by their managers that the orders to reduce homeowners’ complaints came directly from Moynihan and Bank of America board members, who checked caseload figures daily. One such push was called the “Drive to Five,” a plan in late 2010 to lower complaints to 5,000 from more than 15,000.
None other than BofA CEO Brian Moynihan has spoken of the bank's perverse conflicts of interest in this matter: "He told an Atlanta Rotary Club prayer breakfast in October 2011 that foreclosing is “always the option of last resort,” according to prepared remarks. "Foreclosure is not only the worst outcome for a customer, it’s also the worst financial outcome for the servicer and the owner of the mortgage,” he said. “The best decisions are the ones that go beyond our own narrow self-interest.”
This, of course, is a lie: recall that the explicit subsidy that is stuffing bank balance sheets to the gills with "shadow inventory" achieved its mission perfectly: removing millions of housing units in supply from the market, and in the process creating an artificial subsidy as demand had to chase artificially reduced supply, thus pushing home prices higher, and in the process making home ownership far less affordable for everyone else, especially those Americans who not only dutifully pay their taxes, but have a steady job and are willing to pay the monthly mortgage fee. It is they who were and are most impacted by Bank of America's actions. As for the bank, now that prices are artificially higher by 10%, 20% or more percent, watch as slowly but surely the BofA, JPMs and Wells proceed to release ever more housing inventory from their balance sheets, but from a far higher equilibrium price, thus affording them a few quarters of selling into what is still a sellers market, if not for much longer.
But perhaps the best way to visualize how HAMP failed, is through a case study:
Jose De Santiago, a municipal inspector in Mission Viejo, California, was in the midst of a modification in December 2011 when he got the letter: He had five days to leave his two-bedroom condo. De Santiago, 43, spent Christmas packing his belongings with his son Joseph, then 13, and was out the next day.
After a Bloomberg News reporter alerted the lender’s communications department, Bank of America bought the condo from Alton Holdings Inc., which had purchased it in a foreclosure auction. A bank lawyer apologized, and De Santiago was allowed to move back after two weeks.
Bank of America offered $5,000 to compensate him for furniture lost in the eviction, according to a draft of a proposed settlement. De Santiago refused because he would have had to sign a liability release, he said. He’s still fighting the lender to get it to repair his credit scores.
“They asked me to put in writing how well they treated me,” De Santiago said. “I can’t believe Bank of America was allowed to do the horrible things it did to me and others.” Bank of America’s Sturzenegger said some customers who should have received government assistance may have fallen through the cracks of the system the lender created.
“If you went back and re-reviewed the documents, based on today, would they have qualified for HAMP?” Sturzenegger said. “Possibly. That’s the best way to answer it.”
And with Bank of America doing all of the above, one can be certain that every other bank was doing the same.
As for the endgame: "The CEO, dogged by investors’ questions about mortgage costs since taking over in 2010, is dismantling the division that handles delinquent borrowers. The unit had 6,200 contractors as of June, down from its peak of 16,900 last year."
Since the grotesquely criminal behavior described above likely only touches the surface of what went on at Bank of America et al, one can see why, and one wonders: just what else will be revealed when the centrally-planned experiment to prevent the grand reset finally fails and the Fed's liquidity tide finally goes out. Whatever it is, we can fast forward to the conclusion and inform American taxpayers that the biggest losers will, once again, be you.